2010 FIXED INCOME FINAL EXAM

2010 FIXED INCOME FINAL EXAM

Today is March 30th 2010. On an excel sheet you will do the following :
Sheet 1 (name your sheet PRICE):
 price a 5 year semi annual 5% coupon paying corporate bond yielding 4%. (use exp
for present value)
 Calculate the sensitivity of the bond and show that convexity is 19.80
Sheet 2 (name your sheet Pdef)
 A similar coupon risk free bond trades at $1270 to yield 2%. Calculte the probability
of default of the corporate bond in sheet1.
Sheet 3: (name your sheet CDS)
 Calculate the 5-year CDS of the corporate bond with the p(def) you found on Sheet 2.
assume 40% recovery rate and a notional of $10 000 000 and corporate event on the
bond occurs in June 2010.
Sheet 4: (name your sheet Conclusion)
 What do you notice on your CDS price when the spread between your risk free and
corporate bond widens ? Can you find any correlation between the 2?

Make sure all cells are interrelated on your 3 sheets.